Good morning. Good afternoon to everyone on the line here. This is Rahul Bajaj from Citi Research in Dubai. We are delighted to host Abu Dhabi Commercial Bank's third quarter 2026 earnings call today. Representing ADCB, we have Deepak Khullar, the Group Chief Financial Officer. We have Robbert Muller, Group Treasurer, Monica Malik, Group Chief Economist, and Harsh Vardhan, Senior Head of Investor Relations. At this time, without further delay, I will pass on the call to Harsh. Harsh?
Thank you, Rahul, and good day, ladies and gentlemen. Welcome to ADCB's call on our third quarter 2026 financial results, which were announced yesterday. We will be referring to our earnings presentation available on our investor relations website. I am joined today by Deepak Khullar, Group Chief Financial Officer, Robbert Muller, Group Treasurer, and Dr. Monica Malik, our Chief Economist. We will discuss the key financial highlights, followed by the operating environment and guidance before opening the floor for questions. With that, I will now hand over to Deepak to begin on slide five.
Thank you, Harsh, and good morning, everyone. ADCB's record results for the first nine months of 2026 demonstrate the earnings power of ADCB's franchise, supported by positive momentum in the U.A.E. economy and disciplined delivery against our five-year strategy. We continue to generate broad-based growth across our businesses while maintaining strong risk management with significant lending activity and increasingly diversified income streams. Third- quarter profit before tax increased 28% year-on-year to a record AED 4.06 billion, marking our 21st consecutive quarter of profit growth and more than tripling since the third quarter of 2021. Net profit after tax reached AED 3.56 billion in the third quarter, up 15% from a year earlier, and at AED 10.3 billion in the first nine months, up 27%, demonstrating the consistency of our earnings trajectory. Return on average equity for the nine-month period was 16.2% compared to 14.7% a year earlier.
Non-interest income continues to be a key driver of performance in the first nine months, increasing 21% from a year earlier and contributing 38% of operating income. Over the same period, the cost-to-income ratio improved by 40 basis points year-on-year to 27.3% as revenue growth outpaced operating expenses. We continue to expand the balance sheet at pace. Net loans grew by AED 66 billion, or 16% over the first nine months, and customer deposits by AED 58 billion, or 12%. We have also gained market share in both loans and deposits, reinforcing our position as one of the leading banks in the U.A.E. We achieved this growth while continuing to strengthen asset quality. Cost of risk improved to 36 basis points for the first nine months, compared with 73 basis points a year earlier, and the non-performing loans, NPL, ratio reached a record low of 1.6% at September end.
Reflecting the strong underlying credit quality of our portfolio, we have lowered our cost of risk guidance to below 50 basis points from below 60 basis points for both the full- year 2026 and our five-year strategy. Our capital and liquidity position remains robust, with a CET1 ratio of 13.79% and a liquidity coverage ratio of 116.8% at September end. We are now one year into our AI transformation program and making significant progress in embedding it across the bank with a disciplined governance framework. AI is increasingly becoming a core enabler of our operating model, raising productivity, improving the customer experience, and giving us greater operational scale. Together with our broader digital capabilities, these investments are delivering tangible business value and strengthening our competitive position. Turning to slides six and seven, which present the key income statement details for the first nine months and the third quarter.
Operating income rose 10% year-on-year to AED 18.31 billion in the first nine months, led by another strong contribution from non-interest income. Beyond the headline growth, this reflects an earnings base that is becoming steadily broader and less reliant on any single source of revenue. Operating profit before impairment charge increased 11% year-on-year to AED 13.3 billion for the nine-month period and 7% to AED 4.53 billion in the third quarter, up 4% on the previous quarter. What stands out is the repeatability of this performance. Each quarter this year has built on the last. Sustained business growth, rising profitability, strong returns, and a rigorous approach to risk give us confidence in the resilience of our earnings trajectory and our ability to continue creating value for shareholders. Moving to slide eight. Net interest income rose 4% year-on-year to AED 11.34 billion in the first nine months.
Strong loan growth more than offset the impact of lower interest rates following three benchmark rate cuts between September and December 2025. In the third quarter, net interest income grew 4% quarter-on-quarter and 2% year-on-year to AED 3.87 billion. Net interest margin was 2.22% for the nine-month period and 2.16% in the third quarter, four basis points lower than the previous quarter. Asset yields improved during the quarter, but funding costs rose slightly faster as we increased term deposits and wholesale funding to maintain strong liquidity buffers. Importantly, as we have highlighted on previous calls, we managed the bank to a risk-adjusted NIM, which increased 11 basis points from a year earlier to 1.89% in the first nine months and held steady at 1.87% in the third quarter, supported by a lower cost of risk and our strategic emphasis on lending to government-related entities.
On slide nine, non-interest income increased 21% year-on-year to AED 6.96 billion in the first nine months, continuing to play a central role in our growth. Fee income was a major contributor, with net fee and commission income rising 24% to AED 3.37 billion in the first nine months. Loan- processing fees increased 39% on the back of strong lending origination, and card-related fees grew 22%. With growth spread across products and closely tied to client activity, our fee income rests on a broad and sustainable base. Net trading income for the nine months rose 39% to AED 2.89 billion, driven mainly by gains on financial assets at fair value through P&L, as well as higher foreign exchange income. Non-interest income now represents 38% of operating income, up from 35% a year earlier.
This rising share reduces our sensitivity to interest rate movements and adds stability to our earnings. The third quarter extended this trend, with non-interest income up 19% year-on-year to AED 2.45 billion and fee income up 28%. Turning to slide 10, income growth again outpaced costs in the first nine months, delivering positive jaws and a 40-basis- point year-on-year improvement in the cost-to-income ratio to 27.3%. Operating expenses rose 9% year-on-year to AED 5.01 billion as we continue to invest in our people, technology, and AI, and in building new business capabilities. We remain focused on delivering efficient growth, continuing to optimize our cost base while maintaining a significant level of investment in the franchise over the coming quarters to support future profitability. I will skip slide 11, which summarizes the key balance sheet metrics and move to slide 12.
Strong credit demand across the U.A.E. economy supported loan growth in corporate, retail, and private banking. Net loans rose by 16% in the first nine months, including AED 24 billion, or 5% in the third quarter. The third quarter was driven by domestic lending, with the U.A.E. accounting for over 90% of the quarter's loan growth, with personal lending increasing by AED 14 billion during the quarter, alongside further growth in lending to government-related entities. New lending reached AED 128 billion, more than double the AED 62 billion of repayments over the same period. Geographically, the U.A.E. accounts for 71% of gross loans and international exposure for 29%, consistent with our strategy of a balanced domestic and international portfolio. As the loan book grows, it continues to become more diversified and increasingly resilient.
Turning to slide 14, the credit quality of our portfolio strengthened further, supported by sound underwriting standards and close portfolio oversight. The NPL ratio fell to a record low of 1.6% at September end from 1.7% in June. Provision coverage stood at 156%, and total coverage including collateral at 263%. Net impairment charges were AED 1.65 billion in the first nine months, 44% lower year-on-year. In the third quarter, the charge declined 57% year-on-year and 12% quarter-on-quarter to AED 472 million. The year-on-year reduction largely reflects elevated provisions on a small number of legacy corporate accounts in the second and third quarters of 2025. Asset quality has strengthened alongside the strong loan growth, confirming that the quality of our lending has kept pace with its scale.
Cost of risk was 31 basis points in the third quarter and 36 basis points for the nine-month period, around half the 73 basis points recorded a year earlier. With that, I will hand over to Robbert, who will take you through the investment portfolio, customer deposits, and the capital position.
Thank you, Deepak, and good morning to everybody on the call. Our investment securities portfolio remains an important source of liquidity and diversification for the bank. At September end, the portfolio stood at AED 169 billion, an increase of 6% from a year earlier and 2% year to date. Approximately 99% of the portfolio was invested in bonds, maintaining a high- quality and well-diversified investment profile. In terms of accounting treatment, 41% of the investment securities were carried at amortized cost, with the remaining 59% at fair value through other comprehensive income and mark-to-market on a daily basis. Turning to slide 17, we continue to see strong momentum in customer deposit inflows, reflecting the strength of the ADCB franchise and customer relationships. Deposits increased by 12% during the first nine months to reach AED 558 billion at September end.
The third quarter was especially strong, with inflows of AED 32 billion and growth across every business segment. Over the past 12 months, deposits increased by AED 76 billion, ahead of the AED 71 billion growth in net loans. Our lending expansion remains well-funded by our customer base. Deposits account for 70% of our total liabilities. Current and savings account balances grew 16% year-on-year to AED 251 billion and represent 45% of total deposits, and that is broadly unchanged from a year earlier. Term deposits accounted for AED 21 billion of the quarterly inflows, which, together with our wholesale funding activities and balance sheet optimization, supported a robust liquidity position at quarter end. Reflecting this funding strength, our liquidity coverage ratio increased to 116.8%, up from 109.5% in June, while the loan-to-deposit ratio remained comfortably at 84%.
Turning to slide 18, our capital position strengthened further during the quarter. The CET1 ratio rose to 13.79% as of September end from 13.66% in June, and the capital adequacy ratio stood at 16.54%. Both ratios are comfortably above regulatory minimums, and the CET1 remains ahead of our 12% guidance. Our growth is also generating its own capital. Earnings added 192 basis points of CET1 in the first nine months, which supported 16% loan growth while holding the ratio steady compared with December. This gives us room to keep on investing in our strategic priorities while maintaining adequate buffers above requirements. With that, I will hand back to Deepak to discuss the operating environment and guidance.
Thank you, Robbert. Turning to slides 20 and 21, the U.A.E. economy continues to demonstrate resilience, supported by strong fundamentals and sustained domestic investment. The PMI has remained in expansionary territory throughout the year, strengthening in September as output and new orders picked up, pointing to renewed momentum in non-oil economic activity. There has been some tightening in banking sector liquidity, though still comfortable, as loan growth has outpaced deposit growth. The investment outlook also remains constructive. Project awards have held up well during the first nine months, with Abu Dhabi accounting for almost half of the total across the U.A.E. Looking to 2027, we expect a rebound in economic growth led by both the oil and non-oil sectors. Strong government spending, the ongoing investment cycle, and the recovery in externally facing sectors should support this rebound.
Finally, turning to slide 22, I would like to bring together the key messages from the first nine months. Our performance this year has been strong on every front. Record profitability, supported by growth in both net interest income and non-interest income, positive jaws, substantial expansion in loans and deposits, and a further improvement in asset quality. The sustained performance of the portfolio has allowed us to lower our cost of risk guidance to below 50 basis points, and we remain on track to deliver against our full- year 2026 guidance and the targets of our five-year strategy. With a solid capital and liquidity position, we are well-placed to keep supporting our clients and the U.A.E.'s economic ambitions, and we approach the final quarter of the year with confidence. We will now open the floor to questions.
Hi, Deepak. This is Rahul Bajaj from Citi. Maybe I'll kick off, and then we have others come in as well. So two questions from my side to begin with, Deepak. The first one is on deposit competition. You mentioned earlier that clearly there has been some elevated cost of funding and deposit competition in the market. Are you seeing any signs of easing in the fourth quarter so far of this competition easing? And how do you see this competition evolve on the deposit side and over the next couple of quarters? So that is my first question. My second question is on the lending growth that ADCB has seen during third quarter. Just wanted to understand, were you involved in the leveraged part of the FCNR deposits, which Indian banks were doing?
If so, what part of the growth or what percentage of the growth that you saw in third quarter QoQ came on back of those leveraged FCNR products? Which I would assume as one-off in nature, and that should normalize in fourth quarter. So those are my two questions, Deepak. Thank you.
Thank you, Rahul. Let me take the second part of the question on lending growth, and then Robbert Muller will respond to the deposit competition, et cetera. As you can see, we've had a strong third quarter in terms of lending growth as well, both from the corporate side and on the retail side as well. Retail has grown significantly. And yes, the FCNR product, which is well-known, has been part of that. So FCNR is a seasonal product, and we've leveraged on that. It's delivered an uplift to both the assets and the revenues in the third quarter. And we expect to offset any normalization through other opportunities in the pipeline for the following quarter. So yes, we did participate on that, and it has been a significant contributor to the uplift in both the asset and revenues in the third quarter. Robbert?
Sure. On the deposit, we have been talking about the deposit competition in the past as well. Even prior to the conflict, this market has been competitive. That, of course, has not changed since the start of the conflict. We have seen the excess liquidity in the system go down significantly over the last six months or so. Then, of course, the last quarter, it was also unclear as to what was going to happen with the resilience package that the Central Bank extended on 30th September . I think going forward, I do expect this competition to be there. It may be slightly less. It's still early days. We are only three weeks into quarter four. We do see some easing on pricing, but that may also be anecdotal.
I think from our perspective, we will continue to see competition for deposits and, as a result, elevated prices. Also to put it a little bit into context, this is only a certain segment where there is this competition. As we have said before, there's also a large part of our funding base that we continue to roll on pre-war levels that is not price sensitive. But there is clearly a segment which is the more professional part of the funding market that is asking for higher returns, and that's what we continue to see so far.
Understood. That's very clear. Thank you. Operator, can we please open the floor for questions?
Thank you. If you have a question, we ask that you please use the raise hand function at the bottom of your Zoom screen. Once your name has been announced, you can ask a question. If you want to withdraw your question, please lower your hand using the raise hand function. We ask that you please limit yourself to two questions. Our first question comes from Naresh Bilandani with Jefferies. Please unmute to ask your question.
Yes. Thank you. Hi, it's Naresh Bilandani from Jefferies. Congrats on the results. Two questions, please. One is, Deepak, thank you for confirming on the FCNR product. Would you please be able to enhance on the level of participation? I think, I'm trying to just gauge how would the normalized run rate in the loan processing fees and the non-mortgage retail product look like had the FCNR product not been around? Generally, would it be fair to assume that you garnered a new customer base there? Would you see any cross-sell potential into this new customer base that you have garnered from the scheme? Just trying to understand the extent of participation so we can look at the normalized run rate, excluding the FCNR. That's the first question. My second question is on asset quality.
Would you please be able to share any thoughts on the FIRP 3.0? Just trying to understand what that looks like. How does that compare to the FIRP that was originally announced at the start of the conflict? What benefits, if any, have you accrued as a bank from these measures that we may not see repeating into the next year? Just one side question on asset quality. There was a reversal in the general impairment reserve and equity that we are seeing in note 19. If I compare that to the second quarter, would you please be able to confirm what drove that? I'm assuming this reversal, as I understand, was done directly in retained earnings and did not pass via the P&L. I'm sorry, there's a bunch of questions in here, so I'm happy to repeat any if you would have missed that.
Thank you.
Thank you, Naresh. Let me take the first question. In terms of the FCNR, as I mentioned earlier, we do have a very strong customer base existing and some new as well who've been participating in this product. As I mentioned, this is a seasonal product. Obviously, it won't be repeated every quarter. It has delivered a significant uplift to both the assets and the revenues in this quarter. Any such normalization, we obviously will not be repeating in quarter four, but through other opportunities that we see in the pipeline. So we expect to see that normalization come through other opportunities that we have in the pipeline. I don't want to give you excluding FCNR numbers, et cetera, because that's not what we split out in our public disclosures. But suffice to say that we expect to compensate that.
In terms of asset quality, you are seeing strong asset quality, both in terms of NPLs and the coverage ratio. Some of the deferrals that we had done earlier obviously have now moved by the stages. We haven't seen any significant movement there except in probably credit cards a bit. Other than that, the asset quality of the bank remains quite robust. In terms of the last one on reversal in general, the reserve through the equity. The way this works is that the impairment reserve under equity is a function of the IFRS provisions and the CBUAE's requirement of 1.5% of credit risk-weighted assets. The provisions for this purpose include both IFRS provisions and certain other adjustment on assets.
Anything that we take through this gets run past equity, and if there's any release, it also gets released to the reserves and equity and not through the P&L. Obviously, we reassess this at every quarter, and we'll continue to do that.
Thank you, Deepak.
Thank you.
Thank you. This would have gone effectively back into retained earnings, right?
Yeah.
Then, Deepak, what was the need for doing this? Shifting from one line. Ultimately, would you be able to clarify whether this reserve forms a part of the CET1, or is that not the case?
It does form part of that, yeah.
Okay. Okay, Deepak. Thank you very much. I may have some follow-up questions.
We reassess this at.
Yeah.
Absolutely, but this we reassess at every quarter. It is not that we look at it only at the year-end or at the beginning of the year. This is reassessed at every quarter.
Okay, Deepak. Thank you very much for the clarification.
Thank you.
Thank you. Our next question comes from Jitendra Singh with Al Ramz Capital. Please unmute to ask your question. Jitendra, I can see you're unmuted. Please go ahead with your question. Looks like we're having some issues with Jitendra's audio. We'll now move to Rahul Rajan of Bank of America to go ahead with your question.
Hi. Yes, this is Rahul Rajan from Bank of America. Congrats on the good set of results. A few questions from my side, please. Firstly is on the NIM trajectory and loan growth into the next year, into 2027. I understand you don't give a guidance yet, but broadly, how would you see in terms of loan growth next year versus this year, and also on NIMs in terms of potential rate hikes and also the cost of funds pressure. Therefore, how would you see NIMs trending through next year? That's one. Secondly is from a tax rate perspective, how should we see tax rates in 2027 and beyond? Should we see ADCB continue to avail the benefits from the lower tax rate? Thirdly is a smaller one. Any one-offs in terms of gains that you might have recorded in your non-funded income in the third quarter?
These are my three questions. Thank you.
Thank you, Rahul. Loan growth next year, we expect the same momentum of 2026 continue. We have a good line of sight of deals in the pipeline. What we see in the macroeconomic environment also supports that. We expect to see similar double-digit growth coming in 2027 as well. On the NIM side, for the rest of the year, we expect them to be broadly stable to slight compression on NIMs. But risk-adjusted NIMs, we expect those to hold up. Next year, similarly, I think a small compression in NIMs, but not significant. In terms of tax rates, 2027 and beyond. Again, this depends on the exemption that a bank can claim. The maximum period that's allowed for is five years, and you have to qualify for that each year.
Clearly, the bank's intention is to continue to work towards that, but if there are any changes to that, we will signal that to the market with the year-end results. Lastly, in terms of any one-offs, there aren't any significant one-offs that have contributed to the uplift in the income. Similarly, on the cost side as well, we haven't seen.
Rahul, on your question on rate sensitivity. As you are aware, ADCB has limited its exposure to rate sensitivity over the last couple of years. If rates were to go down, which is unlikely at this point in time, that would have an impact of AED -100 million on an annualized basis. If rates were to go up, which I think is more likely, that will have an uplift of AED 126 million on an annualized basis. That would equate to approximately two basis points of NIM uplift. The difference between rates going up and going down, that's because the assumptions about pass-through or pass-on are different for the various scenarios.
Got it. Thank you. Just to follow up on the NIMs aspect. You mentioned risk-adjusted NIMs to hold up through the rest of the year, maybe small compression next year. What is your, the Central Bank rate assumptions in these numbers?
We see one more rate hike by the Fed, which we see the U.A.E. Central Bank continuing, and that would be in December. Then we see rates on hold for 2027, though we do highlight risks of one further rate hike in the first quarter of next year. Our core scenario is one more rate hike and then hold.
Thank you so much, team.
Thank you. Our next question comes from Jitendra Singh with Al Ramz Capital. Please unmute to ask your question.
Hi, thank you. Can you hear me now?
Yes, we can.
Yeah. Hi. Thank you for taking my question. Just a quick question, maybe, I want to come back on the loan growth, particularly on the retail side. We noticed that, in the other retail loans, there's increase quite sharply from around AED 46 billion to AED 59 billion this quarter. Could you give us some color on what's driving this growth? Is it mostly unsecured personal loans or secured auto? Is this mainly organic, or is there any change in the portfolio mix? That's one. Second, I just wanted to check on your trading income side. On the previous calls, you have mentioned that around 60%-65% of trading income was repeatable. Now, trading income has remained strong at nearly AED 1 billion this quarter. In the last few quarters, it's been around that level. Does that 60%-65% estimate still hold?
How much of trading income is coming from realized client activity versus unrealized fair value gains? So those are my two questions. Thank you.
I'll let Robbert Muller respond to the trading income, but let me take your question on the lending side again. On the retail lending side, I think, I've mentioned this earlier in the call. Clearly, with the increase in the asset balances and the strong lending that we've seen, loan-related fees has also moved up in concert, and a lot of that is both secured lending, which is the FCNR piece. So yeah, that's on the loan side and the fees. On trading income, I'll let Robbert Muller comment.
Yeah. So again, like we've discussed before, we have continued to invest heavily in our franchise and our capabilities, and I think the 60% - 65% still holds up. We have seen, I think, very consistent performance this area over the last few quarters, and we expect that to continue going forward as well.
Thank you. Our next question comes from Jon Peace with UBS. Please unmute to ask your question.
Hi. Thank you. So first question, please, is on the new cost of risk guidance. I remember when you originally gave less than 60 basis points, it felt like a cautious number. But I think the reasoning was that it's a five-year outlook, and there will be cycles, and you want to allow for those cycles. So, if you're now reducing it to under 50 basis points, does that mean you don't expect the cost of risk to go materially above 50 basis points over the next three years? Then, the second question please, is on absolute costs and the growth rate. It's crept up a bit over the last period. Would you expect that to trend back towards mid-single digit growth next year, or is it going to be a revenue-dependent decision? So as long as you're seeing very good jaws, you're happy to let it grow a little faster.
Thank you.
Thank you, Jon. Yeah, the cost of risk guidance, we've lowered it based on what we're seeing in the book. The book has moved to a much higher quality credit, not just on the GRE and government lending side, but even the quality of the corporates that we've been booking over the last several years. So it's a much higher rated book, and therefore, we see a much lower ECL coming through. And based on what we've seen over the last three quarters in terms of cost of risk and the line of sight that we have, we have reduced that number. So we've been trending in that 30 basis points range, and we feel that probably the opportune time to bring down that cost of risk guidance.
Clearly, you are right, there will be cycles, but from where we stand and the quality of the book that we have now, we feel that should be a reasonable number in terms of our guidance. In terms of absolute cost and growth rates, the bank continues to invest and will continue to invest in people, technology, digital, AI, and we will see an increase in absolute costs. What you have seen thus far is positive jaws in the current environment as well. I think it is the right thing to do, in terms of investment. Our cost-to-income ratio is at a very low level in the mid 20% or it is 27% odd. So absolute cost will go up as the bank continues to make investments in these areas.
Okay. Thank you.
Thank you. Your next question comes from Shabbir Malik with Morgan Stanley. Please unmute to ask your question.
Hi. Good day. Can you hear me?
Yes, we can, Shabbir.
Perfect. Just one question from my side. If I look at your capital position, CET1 is about 13.8% right now. I think by the end of the year, assuming dividend, it comes down to about 13% or so. What is your sense on your capital position? Do you think you have sufficient dry powder for the growth, or the loan pipeline that you are seeing in 2027 and potentially even going forward?
Thanks, Shabbir. You are right that the CET1 will likely come down in quarter four, with the declared dividends or the proposed dividends that comes off as a deduction in the fourth quarter. We expect to see the effect of that. But so far, the capital generation, the organic capital generation, has funded the growth and the impressive growth that we have seen of 16 odd percent for the first nine months. We expect to see that organic capital generation funding the growth going forward. You would have also noticed that our RWA density of the book has come down significantly as well. We are moving into, as you can see in terms of GRE lending, government lending, secured lending as well. The RWA density is coming down as well.
I think at these levels, we will continue to be able to fund our growth through organic capital generation.
Perfect. Thank you.
Your next question comes from Murad Ansari with GTN Middle East. Please unmute your line.
Yes. Good afternoon. Thanks for the call, and congratulations on a strong set of results. A few questions. Firstly on the loan book growth that we have seen in the third quarter. Obviously, a large proportion of that was driven by retail and, based on your number, about AED 7 billion on non-mortgage retail and about AED 8 billion on private banking. Would it be fair to assume that majority of the FCNR kind of loans would be booked under private banking? Then related to that, we have seen a AED 311 million, I think, charge within the private banking segment on the provisioning line. Just wanted to see if these are more precautionary driven by the growth in the book, or you are being a little bit more cautious because even in the first half, there was about a AED 300 million cumulative charge. That is one. Then on the cost of risk.
You have averaged around sub- 40 basis points. Your guidance is under 50 basis points. That leaves quite a bridge range. Is there anything that you see that would require you to raise or build up coverage or provision into the fourth quarter? Or the third quarter number is, or the nine-month average is more or less where we would expect fourth quarter to be? Just if there is any thought that you can share on that. Then on asset yields, we have seen decent pickup quarter-on-quarter. How much of that was the retail book adding to yields, or has the rate hike also played a part in that? Would you expect that to move up further over the fourth quarter? Lastly, if you could just confirm on the management overlays that were booked in the first quarter.
Has any part of that been reversed, or you would be looking to reverse that in fourth quarter? Thank you.
Thank you, Murad. Your question on loan book growth on retail, AED 7 billion and AED 8 billion private banking. Yes, a large portion of that FCNR loans are booked both under retail and under private banking as well. It goes under both segments. The AED 311 million charge that you are talking about on the private banking. Private banking in our segment also has the private banking businesses, LLCs, et cetera, of the private banking individuals. Some of that provisioning is taken on some of those business loans, and some of that is overlays and general impairment provisioning as well. The asset yield and the retail book, yes, has contributed to the slight uplift in the asset yield. The rate impact has not yet fully flown through. This was a late September hike, so hopefully some of that will flow through in the following quarters.
I think the cost of risk, I think your question was around the sub- 40 basis points is where we are tracking. Yes, and we have guided towards less than 50 basis points. I think that is a fair corridor for us to operate in.
Yes. You would not see any reason for. Because it is quite a wide range from 36 basis points where you are to about 50 basis points. I appreciate that under 40 basis points would still be under 50 basis points, but you do not see any risk of a major increase in cost of risk versus where the nine-month average would have been. Lastly, if you could confirm on the overlays booked in first quarter.
Yeah. Let me talk about the overlays. Yes, we took some overlays in first quarter, and we have written back some of that. But I think more than half of, or roughly half of that still remains as an overlay, and we assess them at every quarter. In terms of what we see, I do not think we see anything significant in the pipeline in terms of elevated cost of risk. That is the reason why we brought down our guidance from 60 basis points- 50 basis points as well.
Great. Thank you so much.
Thank you. Your next question comes from Aybek Islamov with HSBC. Please unmute to ask your question.
Yes. Thank you for the conference call. Thank you for the answers so far. I wanted to clarify a few bits on the asset quality. The question is on, could you guide us what was your credit general impairment allowance to credit risk-weighted assets in the third quarter? It looks to me that this reversal of general impairments within your equity led to this ratio drop below 1.5% in Q3. It would be great to have clarification here. That is number one. Number two, your slide deck, slide number 14, shows the NPL coverage 156% as of September 26. Can you remind us what goes into this NPL coverage calculation? In fact, you have footnotes here, but again, I can take this question offline, but I cannot reconcile this 156% number.
It is your IFRS 9 reserves, it is your fair value adjustment that you show on the same slide, and it is also that general impairment allowance within your equity, right? Which goes into this coverage, and it is the NPL number or stage three loan number which you report. These are the two kind of accounting questions. Thank you.
Sure. Aybek, perhaps on the coverage ratio, on the adjustments that we have taken, not the adjustment, the calculation, perhaps we can take that offline, and I can give you the detailed calculations behind that. On the, I think your first question was on the asset quality and the general impairment provisions. Is that correct?
Yeah. So general impairment provision to credit risk-weighted assets. That is the ratio that regulatory central bank monitors, right? It has to be 1.5% of credit RWA, if I am correct.
Yeah. So there are two elements here. One is the IFRS provisions, which work on an ECL model. That goes into the calculation of the ECL model, and whatever the output is what you take as a general provision. The second element is the central bank requirement to create a minimum of 1.5% of credit risk-weighted assets as a general provision. The difference between these two, what IFRS output is and what the central bank requirement minimum is, can be taken through equity or it can be taken through P&L. It is an option, so we do take it as a reserve through equity and we re-evaluate that at every quarter, and whatever the number is, we would adjust that. Again, happy to take you through that separately after the call-
Okay.
-if you wish.
Yeah. Sounds good. I will get in touch with you. Yeah. Thank you.
Sure.
Our last question comes from Edmond Christou with Bloomberg Intelligence. Please unmute to ask your question.
Hello. Thanks for the call. Am I audible?
Yes, you are, Edmond. Go ahead.
Excellent. I just want to understand the asset yield, the increase in the asset yield. Is it related to FCNR and our credit additions to the book? Related to the same question is, my understanding is the U.A.E. is very competitive market in term of the spread on the credit. We have seen it with the mortgage origination in the last few years, where it's been around 3.8%-4%, so it's pretty competitive. Now, the cost of funding is increasing and the margin is under pressure. The question that I am struggling with is: how do you see this going into next year if cost of funding continue to increase, which is most likely, given the significant pipeline and the credit growth outlook?
Do bank have ability to increase the spread and offset most or all the pressure on the cost of funding and keep their margin relatively stable? Or it will be a drag on margin because the market is competitive and affordability will be an issues, and you need to promote mortgages and other things? Just want to understand this. The second question is, you said you generated 5% credit growth sequentially in the quarters, if I am right? You are able to replicate something similar in Q4 to offset the normalization. If that is true, this will be coming from the GRE or the pipeline, we talk about it in Abu Dhabi. The last question is on the fair value OCI for the investment portfolio. I can see you have booked around AED 760 million. We have seen credit spread widening, and the market very volatile so far.
If it continue as it is, what is your expectation in term of revaluation of OCI for Q4? Because I think the impact on the CET1 at around 30 basis points. Is it possible to see it double for Q4? Thank you.
Okay. Hi, Edmond. So, series of questions here. You're right, the market in the U.A.E. is very competitive and, in terms of cost of funds increasing, yes, we've seen that in the first nine months, and as Robbert mentioned, we're seeing some slight easing of that, in this, first month of the fourth quarter. So margin pressures are there, and the competition is also strong. The way we sort of operate is not just to the net interest margin, but we evaluate client relationships based on RAROC, and we look at the overall contribution of the client, not just from interest income, but from non-interest income as well, which is everything else from cash management to deposits that they place with us, trade finance, commission income, FX, derivatives, et cetera. So we look at the overall contribution of a client to the relationship.
And that's why when we said earlier on, when we announced our strategy last year, we said we wanted to take up our non-interest income from 32% it was then, to around the 40% mark, and we're close to that now at 38%. As we deepen our relationship with our clients, we expect that the non-interest income will, I wouldn't say compensate for the margin pressures, but will contribute far more in terms of profit growth, in the coming quarters as well. In terms of the 5% sequential growth, yes, we saw that GREs are a major contributor to that growth, and we expect similar momentum coming from the similar sectors as what we've seen in the first nine months. Government spending, infrastructure spending, where we expect to participate in these loans. We are gaining market share as well.
And, I think lastly on the trading income and fair value, that's a factor of the market, so I can't give you a definitive number or a trend. This is something we look at each quarter, but Robbert -
No, maybe just to add some numbers to it. So if I look at the mark-to-market of the OCI book as per the 30th September, that was a AED -0.9 billion, a negative mark-to-market. And on the amortized cost, it was roughly AED 2 billion negative. And again, this portfolio is heavily diversified in terms of regions, so I think that in itself gives us protection of any spread widening going forward. While I also have to note that the impact on spreads have been fairly limited so far. And also, please take into account that the duration of this portfolio is very short.
Most of these exposures in this portfolio has been hedged against interest rate risk within the use of interest rate derivatives. And the duration for the entire book is less than a year.
Thank you.
Thank you. We've had another question come in from Xinyu Wang with China Securities. Please go ahead with your question.
Okay, thank you. Thank you very much. Congratulations on the results. I have one simple question about asset quality. I noticed that there has been a rise in the credit card delinquency rate in Q3. What was the main reason, and is there a higher risk of the conflict carry pressure on the household debts or arrears in U.A.E.? Thank you.
Sorry, was the question-
Around credit card delinquencies? Yeah.
The credit card delinquency increase was primarily a timing effect associated with the phased removal of FIRP. This accelerated the recognition of delinquencies that would otherwise have been spread over a longer period. Early stage delinquency formation improved towards the end of the quarter, which suggests that the increase is largely transitory and concentrated in existing delinquency vintages. Again, our credit card delinquencies are still way below the rest of the market. Not just in credit cards, but across every product that we track. I don't think this is an indication of a broader trend, of increasing delinquencies.
Okay. Thank you.
Thank you.
Thank you. We have a follow-up from Aybek Islamov with HSBC. Please go ahead with your question.
Yeah. Thank you very much. Just one brief follow-up. How do you think about the local funding premium that you now have to pay for the deposits since the conflict started? Do you see it as a transitory or more of a here to stay kind of structural funding premium that you have to deal with?
Yeah, I think it's a good question, and of course, difficult. I don't have a crystal ball to see how this develops from here. What you do see, of course, is that the loan growth momentum continues. You can even argue that the U.A.E. is doubling down in certain aspects. Abu Dhabi Commercial Bank wants to play a role in lending into this development as well. So I think we will see some pressure on funding going forward. You can also see it in the dollar SOFR spread that has widened. Again, we are funding some of our dollar positions with AED funding, so that also adds some pressure.
I don't think that will go completely away going forward, but I do expect once the regional situation settles, we will see some sort of a normalization, and that will also lead to lower funding costs over a period of time. But again, it's difficult. I don't have a crystal ball to see where this is going to go, but that will be my base case for me.
If I just add on the-
Thank you. Yeah. Okay.
Yeah. Deepak, any final remarks?
Thank you, Harsh. I'd just like to leave the audience with a couple of thoughts here. The bank has had a very strong performance, in terms of record profitability. We're seeing strong growth in both the net interest income and non-interest income, positive jaws on the cost-to-income side, substantial expansion in loans and deposits, and an improvement in asset quality as well. With strong liquidity and capital positions. We're well- positioned for the coming quarter and 2027 as well. So thank you, and thank you for your time on the call.